The fear of retiring without having enough money is a genuine concern for many Singaporeans. In Singapore, we do not have a social welfare system providing unemployment benefit. That means each of us needs to be responsible for our own retirement.

Of course, there are policies in place such as the CPF system to ensure we set aside a percentage of our income for retirement. However, if you want more than what CPF provides you with, you need to be proactive in saving and investing.

In the table below, we will assume a person starts investing $5,000 a year (or about $417 a month) from the age of 30 till retirement. We shown how much a person can expect to receive based on different rates of return in the financial market.

Amount Invested Each Year: $5,000

If you are above the age of 30 (e.g. 40) and have yet to get started, this table can still be relevant. All you need to do is to shift the age back accordingly. That means if you start investing at 40 and want to know how much you will have at 55, then you should look at age 45 instead.

This table highlight two key concepts about retirement planning that everyone should know about.

Time Period of Investment

The first is the time period of your investment. The table clearly shows that the longer you stay invested, the more you can expect to earn. This is the fundamental reason why it’s important to start your retirement planning early.

The other reason to start early is that it gives more time for your investment to ride out the volatility of the market. For example, expecting a 6% per annum return from the stock market over a 5 years period is a lot more risky than expecting the same 6% per annum return over a 30 years period.

Higher Expected Return = Higher Risk

While being able to get an 8% per annum return is great, we understand that not everyone would find it easy to achieve that, especially if they are not familiar with investing. Getting a higher return also requires taking on higher risk as well, something that not everyone would be keen to take on.

Getting a 4% or 6% return is a lot more achievable. A 4% risk-free return can easily be obtained simply by topping up one’s CPF Special Account (CPFSA). You would not be able to withdraw your money till 55, but if your aim is to work towards retirement, then you shouldn’t be touching the money anyway.

If you want higher returns, you need to take a little more risk. You can consider investing in the stock market. Choose to invest in the market index such as the STI ETF.

Most of the companies within the STI ETF have good reputation and a strong business. Their stock prices may move up and down, depending on the economy, but that’s the reason why we advocate investing over a longer period of time to ride out the volatility, and to also gain diversification via an ETF portfolio, which is vested into multiple stocks.

Unless you are an expert and know which stocks to buy, the STI ETF is probably your best bet in the long term.

Save And Invest More If You Can, Especially in Your Younger Days

One assumption we make in the article is that an individual consistently invests $5,000 a year. However, that doesn’t necessarily need to be the case.

In your earlier years, you may have less financial responsibilities. During this time, you can choose to invest more each year. One easy way will be to allocate your year-end bonus towards your investments, in addition to the regular sum you have set aside.

Investing more in earlier years gives you the added benefit of allowing your investment more time to compound its return over a longer time period, thus giving you more for the future.

As seen from the table above, a simple allocation of $5,000 a year can give you a meaningful return over the long run. Individuals who allocate more will be able to enjoy greater returns.

Regardless of what you invest in, being consistent in your strategy helps, and that’s something we should all strive towards in 2017.

This article first appeared on dollarsandsense.sg/.

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